Euro Weakens Below $1.28 on Deadlocked Italy, Cyprus Concern

March 27 (Bloomberg) -- The euro fell to less than $1.28
for the first time in more than four months as a bailout for
Cyprus and a political deadlock in Italy undermined demand for
the region’s assets.

Europe’s shared currency weakened against all 16 of its
major peers as demand fell at a sale of Italy’s bonds and the
nation’s political parties remained at an impasse after last
month’s elections. Cyprus is preparing details of the capital
controls it will apply when banks reopen tomorrow while Swiss
bank Pictet & Cie. said the crisis has “tarnished” the
region’s appeal. The Dollar Index rose to the highest since
August and the yen gained as investors sought haven assets.

“The banks are set to open tomorrow, so that’s an
uncertainty to see how that’s going to go,” Fabian Eliasson,
vice president of corporate foreign-exchange sales at Mizuho
Financial Group Inc. in New York, said in a telephone interview.
“I don’t think there’s any fundamental belief that this will
topple the euro zone, when you’ve gone through the things you
have.”

The euro dropped 0.6 percent to $1.2780 at 5 p.m. New York
time, after touching the lowest level since Nov. 21. Europe’s
shared currency declined 0.6 percent to 120.71 yen. The dollar
was little changed at 94.46 yen.

Winners, Losers

Mexico’s peso has gained 3.6 percent to the greenback in
the past month, the most of the dollar’s 16 most-traded peers,
while South Africa’s rand has declined 2.6 percent. This
quarter, the Mexican currency has rallied 4.2 percent and the
rand has depreciated 8.5 percent.

Indonesia’s currency touched the strongest level versus the
dollar since March 19 amid concern the government’s plan to
adjust fuel subsidies will quicken inflation. The rupiah gained
0.1 percent to 9,725 to the greenback.

Cyprus may announce what type of capital controls it plans
to implement today as its leaders seek to prevent cash outflows
when the nation’s banks reopen tomorrow. Lenders have been
closed since a plan by the European Union to force losses on
some bondholders and depositors in exchange for a 10 billion-euro bailout. European governments vowed that the tax on bank
accounts won’t set a precedent for future rescues.

‘Damaging Consequences’

“The Cypriot program is not a template, but measures are
tailor-made to the very exceptional Cypriot situation,”
according to a document agreed yesterday by representatives of
euro-zone finance ministries and intended as a guide for
explaining the decision to the public.

“The Cypriot crisis resolution has potentially damaging
consequences for the euro area,” Jean-Pierre Durante, head of
financial-market research at Pictet, said in an e-mail today. It
has “tarnished attractiveness of the euro area as a place to
invest. This could translate into downward pressure on the
euro.”

Italy auctioned a five-year bond to yield 3.65 percent, the
highest at a sale since Oct. 30. It also sold 3 billion euros of
10-year bonds. Investors bid for 1.22 times the amount of five-year notes sold, down from 1.61 times last month. The so-called
bid-to-cover ratio for the 10-year debt was 1.33, compared with
1.65 in February.

Economic Confidence

Europe’s shared currency also declined as a report showed
economic confidence in the euro area fell in March.

An index of executive and consumer sentiment decreased to
90 from 91.1 in February, the European Commission in Brussels
said today. Economists had forecast a drop to 90.5, according to
the median of 30 estimates in a Bloomberg News survey.

The euro has weakened 0.7 percent in the past three months,
according to Bloomberg Correlation-Weighted Indexes, which track
10 developed-nation currencies. The yen slid 7.3 percent, the
biggest drop, and the dollar gained 3 percent.

“A bit of pessimism out of Italy is certainly part of the
story and obviously the Cypriot reverberations continue,” Eric
Lascelles, chief economist in Toronto for RBC Global Asset
Management, which oversees $270 billion, said in a telephone
interview. “There is a general level of wariness. It’s not that
there’s a likely disaster in the next few days. It’s more along
the lines that Europe is materially riskier than previously
imagined and so exposure to European investment is riskier than
first thought.”

Dollar Measure

The Dollar Index, which IntercontinentalExchange Inc. uses
to track the greenback against the currencies of six U.S. trade
partners, climbed 0.4 percent to 83.207, and reached the highest
since Aug. 3. It’s poised for a 4.4 percent gain in the first
quarter.

“The U.S. dollar continues to show a firm profile,” Marc
Chandler, New York-based global head of currency strategy at
Brown Brothers Harriman & Co., wrote in an e-mailed note to
clients. “European events dominate investors’ concerns.”

Sweden’s retail sales climbed 1 percent in February,
beating the 0.2 percent estimate in a survey of economists, data
from the Swedish statistics agency showed. The nation’s consumer
confidence index rose to 2.8 in March from minus 1 the previous
month, a separate report showed.